Real World Examples: Nominal vs Real Wages & Income

📚 Quick Study Guide

• 💰 Nominal Wage/Income: The amount of money you earn, without considering inflation or purchasing power. Think of it as the number on your paycheck.
• 📈 Real Wage/Income: The purchasing power of your nominal wage/income, adjusted for inflation. It tells you how much you can actually buy with your money.
• 🧮 Calculating Real Wage: Use the following formula: Real Wage = $\frac{\text{Nominal Wage}}{\text{Price Index}} \times 100$
• 🗓️ Base Year: The reference year for the price index. The price index in the base year is always 100.
• 🛒 Purchasing Power: Real wages and income directly reflect your purchasing power. Higher real wages mean you can buy more goods and services.

Practice Quiz

1. Which of the following best describes nominal wage?
   1. The purchasing power of your income after adjusting for inflation.
   2. The amount of money you earn before taxes and deductions.
   3. The wage rate relative to the cost of living.
   4. The amount of goods and services you can buy with your income.
2. If your nominal wage increased by 5% but inflation was 3%, what happened to your real wage?
   1. Increased by 8%.
   2. Increased by 2%.
   3. Decreased by 2%.
   4. Stayed the same.
3. A price index of 120 indicates that prices have:
   1. Increased by 20% since the base year.
   2. Decreased by 20% since the base year.
   3. Increased by 120% since the base year.
   4. Stayed the same as the base year.
4. If your nominal income is $50,000 and the price index is 125, what is your real income?
   1. $40,000
   2. $62,500
   3. $50,000
   4. $12,500
5. Which of the following is the most accurate measure of your living standard?
   1. Nominal GDP
   2. Nominal Income
   3. Real Income
   4. Consumer Price Index
6. In the base year, the price index is always:
   1. 0
   2. 1
   3. 100
   4. Variable
7. You receive a raise of 10%, but the CPI increases from 200 to 220. What happened to your approximate real wage?
   1. Increased.
   2. Decreased.
   3. Stayed the same.
   4. Cannot be determined.